ECN Capital Corp

ECN Capital Corp (TSX: ECN) is a financial business service provider. It originates, structures and manages financial products and provides advisory services for financial institutions.

Key Highlights:

• Improved Guidance: The company expects a higher ROE for the foreseeable future, driven by stable profitability growth. For FY20, the company expects ROE in the range of 10.5% - 11.3%, higher than 9% in FY19. ECN assumes its FY21 EPS within the range of USD 0.44 to USD 0.53, in-line with the company’s previous guidance.                                 

Source: Company Presentations

• Addition of Dealers: The company’s business is highly dependent on dealers networking. In the recent past, the company managed to add a strong network of dealers, which is impressive. At the end of Q3FY20, the company reported ~13k dealers, representing a CAGR of ~23% since Sep 17.             

Source: Company Reports

Q3FY20 Financial Highlights:

• ECN impresses with its quarterly results, wherein the company reported an increase in the company’s top-line and bottom-line. Total portfolio revenue stood at USD 61.165 million, higher than USD 58.250 million in the previous corresponding period (pcp). The income was supported by increased revenue from portfolio origination services, partially offset by a significantly lower income from portfolio advisory services and lower revenue from marketing services.
• The company reported total operating expense at USD 55.731 million versus USD 49.962 million in Q3FY19, due to an increase in compensation and benefits, higher general and administrative expenses, and an increase in share-based compensation.
• The company reported adjusted EBITDA of USD 38.9 million, as compared to CAD 34.0 million, a year ago.
• The company posted net income from continuing operations at USD 10.218 million, higher than USD 8.203 million in pcp.
• The company ended the quarter with a cash balance of USD 46.593 million, while total assets stood at USD 1,824.032 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The company is exposed to several risks which include weak financial markets and a weak retail income, which could result in lower traction for the unsecured consumer loans, hindering the overall performance of the company.

Valuation Methodology (Illustrative): P/E based valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

The stock of ECN appreciated 28% so far this year, amidst a volatile equity market. The company has managed to lower down its debt component by USD 113.1 million during the third quarter of FY20 from the previous quarter, which is likely to result in lower finance costs and improved profitability. At the last closing price, the stock traded above the technical support of 50-days, 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish trend. We have valued the stock using P/E based relative valuation approach and arrived at a target price offering single-digit upside potential (in % terms). We have peers like Trisura Group Ltd, Element Fleet Management Corp etc. Hence considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 6.15 on December 4, 2020.

ECN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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